We Can't Just Sit Here Doing Nothing

Early in his tenure as Chairman of the Federal Reserve Board, Ben Bernanke promised to make the workings of monetary policy more transparent. By golly – that’s exactly what he’s done! We no longer read the minutes of the Federal Open Market Committee as if they contain hidden messages as to where policy might go in the future. We even bother to notice who is voting which way; gone are the days when every vote had to be unanimous because any no vote would be considered the equivalent of stabbing the Chairman in the back. These days, the people who vote no want their name out there in bright lights and their reasons spelled out in glorious detail.

The minutes released this week for the August FOMC meeting are a treasure trove of transparency. There is so much transparency because these people at the FOMC don’t know what to do. Some want more Quantitative Easing, but they don’t agree on the form it should take: add even more securities to the Fed’s gargantuan balance sheet (now equal to 4% of the entire GDP of the economy); or, sell some short term securities and buy long term securities in order to manipulate long term rates lower, yet keep the overall Fed balance sheet total unchanged.

In my fanciful imagining of what actually happened at the August meeting, I like to think that one or more members stood up and shouted: “Quantitative Easing was a failure! It didn’t keep interest rates lower. It led to all sorts of speculative trading by hedge funds and banks, protecting themselves against the possibility of hyperinflation. What we got as a result of all this speculation was an inflationary surge in commodities, in gold and other precious metals, and in energy products. This goosed up the stock market, but we didn’t get the follow-through benefits in consumer spending and corporate investment in new businesses and jobs that were promised us if the stock market went up. Now we’ve got a global inflation problem that has led to riots and revolutions from Britain to Bahrain, and a US economy sinking under the burden of higher interest rates and gasoline over $4/gallon. We can’t afford any more Quantitative Easing!”

Maybe some brave FOMC members stood up and told the truth, even if it did embarrass Ben Bernanke and the others who thought Quantitative Easing was an imaginative answer to an economy flirting with deflation and depression. The only clue we have that this might have happened lies with the innocuous statement, all prettified in Fed minute politesse, that some “participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.” That’s about as close as we’re going to get to anybody at the Fed saying Quantitative Easing was a failure.

Wall Street has chosen to ignore the three or four people at the Fed who are worried about inflation, and instead focus on the three or four others, like Charles Evans and Janet Yellen and Ben Bernanke, who think the Fed balance sheet can be expanded to infinity if that is what it takes to reignite the borrowing impulses of consumers and businesses. Wall Street has just gone through a serious bout of drug withdrawal, during which it puked up a huge quantity of stocks. Consequently Wall Street has got the car idling outside the Marriner Eccles building in Washington, waiting for the FOMC to come out with a few baggies of its latest fix of Quantitative Easing.

In another fanciful musing, I like to think someone at the FOMC brought up the moral dimension of monetary policy, or make that the immoral dimension thereof. One of the things that would utterly shock and confound our ancestors from the 1930s, 40s, and 50s, is the Fed’s current idea that the way to get the economy moving again is to force people to invest in the stock market. Our forefathers would be shocked by this idea because they learned the hard way that the stock market has a propensity every so often to destroy the savings of millions of investors – that’s just how the market works. They would be confounded by the thought that the Federal Reserve would deliberately want to punish savers and reward speculators, at a time when the nation is in desperate – you might say dire – need of savings.

The Fed should be fetishizing people who save money, because that is a far better source of investment capital for the nation than borrowing trillions of dollars yearly from the Chinese. Our grandfathers and great grandfathers would seriously wonder why no one at the Fed has caught on to the idea that what the economy needs is the shock treatment of an increase in interest rates of 2% or so, so that savers could earn interest income again, rather than eat into their saved-up capital.

Such a policy would mean that the Fed would be turning its back on the Too Big To Fail banks, and would cease its game – which admittedly is very transparent – of transfering the nation’s wealth from savers to Wall Street speculators. It would mean that some of these TBTF banks would fail, and likely drag down many of their counterparts overseas, because all of these big banks are inextricably tied together by their daisy chain of investments in each other’s deposits and securities, and by derivatives securities bought from each other to protect against the default risk of one or more of the group, and by further derivatives securities bought to protect against the risk that the banks selling the first round of credit protection derivatives might fail in a systemic collapse.

It would also mean that the Fed would have to admit it made a mistake in allowing any bank to become Too Big To Fail. That means that it made a mistake approving so many bank mega-mergers, that it should never have allowed Glass-Steagall to be overturned, and that it should have allowed the market to dish out punitive consequences to the banks that were wrapped up in the failure of Continental Illinois, or Long Term Capital Management, or the dot.com collapse, or any number of similar failures. Most of all, the Fed should not have come to the rescue of the big banks in 2008. Each one of these mistakes by the Fed meant that the bankers were absolved of learning from their own mistakes and changing their behavior. They were also encouraged to expect to be bailed out time and again by the government for their errors in judgment and risk management, which is exactly why Wall Street is waiting yet again for the Fed to deliver another round of Quantitative Easing hopium.

Finally, what almost certainly did not happen at this meeting was anybody jumping up and asking why the entire group of people sitting around the table felt compelled to “do something”. It’s an article of faith when you join the Fed as a Board member or regional bank president that you are there to do something. After all, you have this mandate from the Congress to ensure sound economic growth and promote employment. The government is paying you a lot of money, and you get all this prestige and percs. You not only have all these traditional tools of raising and lower interest rates and reserve requirements; “Helicopter” Ben Bernanke has given you all sorts of new and exciting tools to combat deflation. You are supposed to use them, pull levers, and et voila! – economic growth follows.

Nobody is asking the existential question whether the Fed should do nothing. Maybe the job of the Fed is not to avoid economic pain at all costs. Maybe the Fed should stand back and let deflation occur if that is not only the only way to clear the system of a debt bubble, but if that is the inevitable outcome no matter how many rounds of Quantitative Easing are initiated. Maybe the Fed should not be in the business of regulating banks and running the risk that the banks wind up controlling Fed policy, which is obviously what has happened. Maybe the Fed should find a way to keep the monetary base and the monetary aggregates growing at some steady and moderate rate of increase no matter what happens to the economy. This would certainly be an interesting practice in a fiat money monetary system that is unmoored from any real world asset, such as gold.

The Fed doesn’t seem to be asking these existential questions, but others are. Ron Paul has been raising these questions for years, and he’s at the point where he thinks the Fed should be abolished. He’s currently one of the top vote-getters in the Republican primary race. The leading candidate, Rick Perry, is taking a traditional Texas shoot-first-and-ask-questions-later attitude, by accusing the Fed of treason if it dares to interfere in the presidential election by instituting QE3.

Other people are definitely asking these existential questions. If the Fed really wants to get into transparency, it will join in the discussion, because otherwise the conclusion that is ultimately reached will be imposed on the institution whether it likes it or not.

Meta:

Comments

I've always believed that taxes on the first thousand dollars of savings bank interest (or its equivalent in money market funds) ought to be tax-exempt, period. But that's just me. It seems that George Bailey would be spinning in his grave if the bell hadn't rung for him already.

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"taxes on the first thousand dollars of savings bank interest… ought to be tax-exempt"

In the context of our current reality, this might not be a bad idea, but along with 1,000 other tweeks to the Tax Code, it does nothing to "fix" our problem. The complex set of rules comprising the Internal Revenue Code (USC Title 26) is nothing but a sophisticated distraction from the real issue that we're on a long descent from liberty inaugurated almost 100 years ago. The politicians, some naive, some complicit, cater to well funded interests, their influence for sale at a discount, while the people like bleating sheep are distracted by titillating and unimportant debates over taxing, spending, green energy (WTF?!), global warming, and whether or not athletes use "performance enhancing drugs".

If the American citizenry ever became aware of the true malfeasance of the conduct of our elected representatives as they open their boudoirs to the financial and other corporate interests, we'd be dangerous indeed, thus no expense is saved in keeping us pre-occupied and bickering with one another. Until we get smart and apply some discipline, our true enemy will remain in control over our very thoughts.

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... and, since this is an economics site, could you 'compare and contrast' economic liberty, or civil liberty as resulting from economic policy, in the USA as those liberties existed before 1913 and after 1913?

I'm not saying that you don't have a point. It's just that I have to guess at what your point is. Or am I ignorant of the insider code?

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The 'Opus 1' series specifically addresses the question of what is "the real reason beyond the income tax"? The discussion starts with, and leans on, "a paper that incorporates a review of a book: Does Atlas Shrug? [The paper is titled] 'The Economic Consequences of Taxing the Rich'. It caught my attention because the paper is written by a tax lawyer: Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program ... He also served as consultant to the U.S. Treasury on tax competition and OECD on tax competition, and is a member of the Steering Group of the OECD's International Network for Tax Research and chair of the American Bar Association's Tax Section Committee on Consumption Taxes."

Avi-Yonah cites to "an excellent historical survey by W. Elliot Brownlee of the rates facing the rich from the beginning of the U.S. income tax in 1913 to the present" (Avi Yonah, quoted in 'Opus 1' at Angry Bear).

__________

I digress slightly here to note that the founder of the original (now much-debauched) Chicago school (of economics), Henry C. Simons, was a professor on the faculty of the University of Chicago Law School, not in the Department of Economics. Although a professor of law and not an economist by profession, Simons created much of basic monetarist theory and founded the original 'Chicago School'. How did a law professor become a leading light in both economic theory and economic policy? The answer lies in Simons' approach to economic policy -- namely by way of asking the fundamental question of libertarian thought as it applies to economics, "What economic policy best furthers individual liberty?" Simons believed that individual liberty was not only compatible with democracy but dependent on it. Simons' purpose and work was subsequently perverted by the later -- not the initial -- work of Nobelist Milton Friedman. Perversion of Simons' vision of libertarian economics (which Simons perhaps would have termed 'neo-classical') is today enshrined in the avowedly anti-democracy Ludwig von Mises Institute (located in Alabama, although proclaiming to be the defining source for all economics of the 'Austrian School').

"I never really thought about it, but laws are the means by which we create taxation. They do reflect our reasoning. So, maybe we need to consider law arguments as we discuss taxes?" (Opus 1, Part 1).

"Let me give a little bit of my philosophy here. A long time ago I figured out that in the end, after all the pros and cons are lined up, the research is done, the discussion had, the reason anyone does anything is because they wanted to do it. [Formulation of 'Postmodernist' premise, current c. 2000 C.E.] ... Secondly, I am only as free as I allow you to be. [Formulation, IMO, of basic 'post-anarchist' premise] Before someone starts thinking “libertarian talking here”, I understand that if in my freedom I accumulate enough money such that you have to rent a toilet from me verses buying your own, I'm not free because now I have to make sure the toilet is always available at the time of your need. If I don't accommodate your timing, then I am at risk of retaliation by you (and maybe a few of your friends).

"I have presented in the past that the goal of our economy is defined in the Constitution: ['Opus 1' quotes Preamble of the Constitution, neglecting to cite to Sixteenth Amendment or to extensive evidence as to intent of the People and of Congress in enacting and ratifying that amendment to the Constitution. Anyway, to continue quote of 'Opus 1' ... ]

"Specifically but not exclusively “domestic tranquility”, “general welfare” and “posterity”. An economy has been developed to serve our purpose. In the crudest terms of economic purpose; to create capital, as in "a company exists to create profit". But for me, the crude answer begs the question: why create capital? Because I want to... because of my values. I see taxation as how money comes into play in meeting the goals as stated."

Analysis of 'Opus 1' differs from the analysis of Henry C. Simons, who endorsed redistributive income tax primarily for the purpose of preventing essentially anti-liberty concentrations of economic power, that is, in order to further democratic government within a democratic society. Rather than reasoning, as many do today, that liberty follows from (or is defined as?) unrestrained accumulation of capital in private hands ('globol capital'), Simons believed that the value of liberty was primary, not derivative, and that the preservation of liberty requires that capital be decimated in the cause of necessary restraint of (if I may borrow a term from Ira) "our true enemy" -- which Simons would say is excessive concentration of power whether political or economic, that is, whether concentrated in privately-held fortunes, media ownership, corporate entities or (lest we forget such phenomena as Stalinism!) national or state governments. It is a fortunate by-product of the economics of freedom that, both the stream of economic progress and the stream of personal liberty flow from the same source -- an enlightened people determined to live in a free society.

I suggest that this may be Ira's point, but I'm not sure. Just taking Ira seriously.

... technology seems to have driven the developments of near monies in recent years and it is unlikely that 100% reserve banking could have affected the development of computers which, as we have seen in recent years, enable the creation of financial assets which would have been technologically impossible in the past.

... The problems we face today are in large part a direct result of the programs that were implemented during the early New Deal. The first and most obvious is federal deposit insurance. The amount of money necessary to pay off all depositors is unknown. We have done nothing to fundamentally change the situation. Even modest reforms to limit the amount of federal deposit insurance have been difficult to implement.

The 100% reserve idea did not disappear after the passage of the Banking Act of 1935, in fact, Irving Fisher spent the remainder of his life lobbying Congress and the public on the need for 100% reserves ... It is also not surprising that in recent years, we have seen the emergence of "narrow banking" or "core banking" proposals which are in the tradition of the 100% reserve plan.

If we are ever again faced with economic, and particularly financial, problems on the level of the Great Depression, the clamor for the separation of the depository and lending functions of banks may reappear. It is also clear that the Federal Reserve can do little to cajole banks into lending when they do not wish to do so. What we are seeing is banks buying more government debt, which is available today on a scale far beyond the 1930s. The Federal Reserve can effectively restrain activity during a boom, but during a business downturn can do little to stimulate the economy beyond cutting interest rates to historically low levels. This is precisely the situation we face today.

What are the differences between early 1990s and now twenty years later? One thing for sure, central banks had a much easier time controlling the gold market than they do today. For another thing, that was the last of the pre-WTO era. And there are other differences.

I'm obviously no economist but if it is natural for the market to go up and down, and it is natural for the economy to go up and down and we truly live in a global economy then doing anything without some kind of global consensus ( IE: lets all to the same thing to limit both the down an the up swings ) is a fools game.

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I don't understand the relationship to CDSes and QE, beyond the indirect "pumping" of QE to prop up stock prices, evaluations and such.

I frankly think, reading the public speeches, Bernanke is not gun ho on QE, and wrote as much, pulling recent speech quotes, i.e. I think he's changed his mind since QE2. I think Bernnanke is pointing his finger at Congress, this administration and saying they need to enact effective stimulus, focus on employment.

How much of QE2 results ended up in foreign banks, indirectly?

That's to me the huge problem also is this bizarre policy that goes through Congress as well as the Fed that they should take care of the globe, usually at the expense of Americans.

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He got more inflation than he bargained for, and the worst kind of inflation. Now he has major Republican politicians on his case. This is dangerous for him personally if he wants to get renominated, and it's bad for the Fed's reputation. Add to that a bunch of Fed governors/presidents debunking his policies behind the scenes, and he certainly should show some public backtracking on Quantitative Easing. I don't think that means he has abandoned his life-long conviction that he knows what the Fed did wrong in the Depression and he is going to avoid doing that. But certainly some doubts may be forming in his mind as to the rightness of his actions. Several observers said his Jackson Hole speech had a tone of depression that was unusual for him.

CDSs and CDOs are potential tools to be used by the Fed to influence interest rates along parts of the yield curve. General interest rate futures and swaps could be used as well. There are some claims in the market that the Fed has already been doing this, behind the scenes. Anything is possible, but it is risky to build up a derivatives portfolio like that. You need traders experienced in managing gamma and higher-order derivative's risks. It would pretty quickly be known that the Fed has hired such a team, so that's why I doubt they have taken these steps.

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I wrote up a series of posts in 2008 on the mathematics and also overviewed some research results of computational complexity on CDSes, CDOs. These things, it's truly incredible, are in violation of mathematical properties. i.e. some of the "inputs" being used to their formula do not have the mathematical properties required by the mathematical model.

The idea of the Fed buying these fictional math machinations is scary beyond belief because CDSes (as everybody knows by now) are not bounded, 1:1.

I'm glad you mention derivatives for what's really going on in the markets generally isn't being written about post Dodd-Frank, which from what I've seen is simply a strainer of swiss cheese, doesn't nothing to ban some of these fictional mathematics.

I think some of these quants should be taken to task for not piping up. They must know some of these derivatives are mathematically invalid (or we have more PhDs getting paper because ????)

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The major one, however, centers on the fundamental assumption behind options pricing, which is that a normal distribution is used to describe the statistical properties of prices for the underlying instruments. In the early days, this was already an issue for basic products like foreign exchange or interest rate options. The industry has tried work-arounds with fat-tail adjustments, which at least recognize the problem, but outside of the trading room it is not always clear that options valuations are not in any way "scientific", certainly not in the sense that statistics can offer reasonable predictive power in scientific disciplines like physics and chemistry.

Now extend this to instruments for which there is no rich statistical history, or sparse data points, such as an option on default events for countries or companies which at best can only be compared to data compiled over time for the US, and you begin to see how easy it is to take false comfort in a valuation for an instrument that can blow up at any time. S&P and Moody's can tell you a thing or two about assuming that events are uncorrelated and pose no significant risk. Things they thought were AAA risk in the US housing market were anything but that.

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This piece I translated the computational complexity issue of a CDO to bloggerspeak.

This is the basic definition of the CDS derivative class and it's based on Copulas.

Before this site had LaTex installed, so now we can literally blog up mathematical proofs, I overviewed some issues in we want the formula.

Maybe it would be useful to take a look at the mathematics behind some of these sovereign CDSes and other CDOs. As far as I know nothing has changed, it's still allowing this 1 to many data mapping, which makes use of a Copula mathematically invalid.

I went through all of this over three years ago, so I have to refresh. I think I didn't go into the mathematics of it, figuring how many people even know ratios, never mind strange probability models, but maybe I should just write up the mathematics and go through every element, translate to bloggerspeak each element and ask why the hell billions of buckos are being bet on these monstrocities when it's clear they have contagion and "domino" built right into them by the mathematics themselves?

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The crusade against High Frequency Trading which Zero Hedge started well over two years ago, is now coming to an end. Reuters reports that U.S. securities regulators have "taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes." As everyone knows, the only thing of value within the sub-penny scalping HFT universe are the odd nuances in computer code. Which is why its supreme and undisputed secrecy is sacrosanct.

Business people have been saying that down at the grass roots for a while now -- what Numerian says about interest rates. Not economists, just plain folk. Not based on anything but a gut feeling that the fundamentals are screwed up. IMO, as pointed out by Numerian and pretty obvious to everybody, banks need to be paying interest about 3%. Savings are key to a true monetarist system. Money supply should expand with -- not cause or be caused by -- explosions or implosions of the economy.

Having said that, it is a very good development to be getting away from the czarist approach to Federal government. You know, where the Fed Chair is, if not a demigod, at least a "czar". Got a problem? Appoint a Czar!

Since the Reagan administration, we have been watching this tendency toward glorification of political appointees in a bureaucracy that is dedicated to the well-being of itself and its members and generally subservient to corporate masters through the mechanism of corruption in national political machines.

NO NORE CZARS! For that matter, we need to end the imperial presidency ASAP!

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Things don't have to be as bad as they are ... the economy is trying ... despite everything that corporate media, the Fed, Congress and the FIRE lobby, the military-industrial complex, the White House and the Supreme Court are doing to keep the country on a collision course with disaster.

As I look around me, I see what the charts are saying ... trends are maybe bottoming out ... or not ...

I wouldn't exactly take a 'bullish' view ... it still looks a lot like we are already in a period that could accurately be termed a Second Great Depression ...

But maybe it will be no more than a 'Depression Generation' ... the abandoned grandchildren of that most fortunate of generations, the Baby Boomers ...

It's just the way the cookie crumbles ... many of the grandchildren of the fortunate generation inherit the misfortune of being born at the wrong time ... similar to people and communities wiped out in a tsunami ... as though they had never existed ...

... on the other hand ... maybe the 'Depression Generation' will go on and on and on and on and on ... for half a century or more ... no employment prospects for young people ... whether you have graduated from wherever or not ...

... and meanwhile enforced early retirement for older working people ... only without any replacement income ... quickly draining their savings ... if any ...

QUESTION: At what point would that Depression-like situation equate the USA to a 'Third World' country?

I don't know the answer to that question. But, IMO the USA is not yet a 'Third World' country.

That's my tentative conclusion based on mortality reports for 2008-2009, the most recent years available. I am assuming that a Third World-ization trend would be clearly detectable in national mortality data.

Hunger vs. Death

On the other hand, the AARP has recently published (August 2011) the AARP Hunger Report. Using CPS data, the report makes findings about a category called "food insecurity" which is identifiable by responses to the 18-item Core Food Security Module (CFSM) questionnaire part of the CPS. The most pronounced increases in food insecurity are among 40-49 year olds, increasing "an astounding 68% between 2007-2009 compared to 38 percent (increase) for 50-59 year olds and 25% for those 60 and older. See, Executive Summary of the report -- available at DriveToEndHunger.org webpage --
http://www.drivetoendhunger.org/

According to the webpage, "8.8 million older adults face the risk of hunger." Coupled with the initials 'AARP', you might think that the issue is hunger among the 'senior' (retired) population. However, as is clear from the report, it's really a matter of unemployment and underemployment of pre-retirement American working people.

The term 'Third World' is itself problematic. For one thing, there is no longer any 'Second World' since the dissolution of the USSR and the Eastern Bloc in Europe. (Cuba?) For another thing, the Eurocentric concept of a First World has hardly been applicable since before the end of the 20th Century.

What's more relevant is that the countries and territories that we would probably identify as 'Third World' are those characterized by deaths from famine and malnutrition, from warfare and other mega-disasters, from HIV-AIDS, from diarrheal diseases, cholera, other water-related diseases, other parasite-related diseases, malaria, dengue fever and tuberculosis -- as well as by deaths due to premature birth, low birth weight and other birth trauma or birth asphyxia, plus neonatal infections and other childhood diseases. Those, along with high birth ("fertility") rates, identify 'Third Worldliness' (so to speak).

None of those 'Third World' diseases or other causes of death can be found among the leading 15 causes of death in the USA, per CDC reports.

CDC Mortality Report

USA isn't even trending toward 'Third World' status, based on 2011 mortality report in 'National Vital Statistics Reports' series by CDC's Division of Vital Statistics. (This report is based on database for 2008 and 2009, most recent years considered to be 'available' for statistical purposes.)

What is clear is a continuing upward trend in life expectancy and, accordingly, a continuing downward trend in age-adjusted death rate. On the basis of these statistics, I would say that the USA has a ways to go before falling into the 'Third World' category.

Here's the distinction. Standing in soup lines is a clear sign of economic depression. But Third Worldliness or Third World-ization requires something more objective than answers on a questionnaire form. I'm saying we need to go to a body count to clearly break into 'Third World' territory.

According to the 2011 CDC mortality report --

The age-adjusted death rate decreased from 758.7 deaths per 100,000 population in 2008 to 741.0 deaths per 100,000 population in 2009. From 2008 to 2009, age-adjusted death rates decreased significantly for 10 of the 15 leading causes of death: Diseases of heart, Malignant neoplasms, Chronic lower respiratory diseases, Cerebrovascular diseases, Accidents (unintentional injuries), Alzheimer’s disease, Diabetes mellitus, Influenza and pneumonia, Septicemia, and Assault (homicide). Life expectancy increased by 0.2 year, from 78.0 in 2008 to 78.2 in 2009.

On the other hand, a trend toward increasing infant mortality is also continuing. That's a troubling and controversial issue.

Third World sub-population in USA?

On the issue of a sub-population living in 'Third World' conditions within the USA, CDC data isn't specifically helpful. There may be some relevance by way of a focus on minority racial populations, in particular, Black or African-American. There's also been a focus since Census 2000 on the population identified as 'Hispanic'.

There's less focus on what could be identified as the population of illegal immigrants, where the presumption probably is that the 'Hispanic' part of the illegal population would be the most impoverished, as would also be presumed for the illegal part of the Hispanic population. The problem for statistical analysis is that 'Hispanic' doesn't translate to 'illegal'. And 'illegal' doesn't translate to 'Hispanic' or Mexican.

Moreover, nobody really knows exactly what 'Hispanic' means. It's a political attempt to respond to a perceived political need arising from a political perception of identity politics (cultural determinism).

Mortality rate of Third World sub-population of illegals?

Death is a touchy thing for data collection, other than the basic body count, gender and some fairly accurate age data. It's even touchier for illegals, although there are probably some objective numbers available through records concerning transport of last remains back home.

Aside from the data collection problems, for mortality reports to have any meaning, you need to know the population of the living.

Suppose that for the illegal population, we had accurate counts both of the living and of those who died within the last year. Increases in the living population of illegals would indicate a comparatively non-Third World condition, at least, relative to Mexico. On the other hand, obviously a degree of Third World-ization will manifest. How would we identify the turning point, especially since the government makes data on foreign workers in the USA difficult to obtain? I am saying that, in line with the idea the dead bodies are the best and most objective measure o Third Worldliness (so to speak), then a marked increase in the mortality rate of illegals would probably indicate that turning point.

But we don't have any of that.

First general data collection problem -- counting the living

On major reason that the USA did not begin as a Third World nation is that the Founders decided to make accurate counts of every citizen and even of every slave. Eventually, that expanded to every resident including Native Americans. Third World countries cannot seriously count their population.

Trying to estimate the size of a Third World-ized sub-population involves counting homeless people and transients -- regardless of their native language or ability to speak English and whether they are citizens by birth or by naturalization ... or not citizens here or possibly anywhere else.

Putting numbers on the effects of economic depression involves the same issues ... counting the homeless and transients.

Putting numbers on how many people have 'dropped out' of the labor force without benefit of social security or other compensating income, generally 'laying low' ... that also involves the same issues ... counting the homeless and transients ...

How can you count people who 'don't count'?

The Census tries hard to figure it out, to count everybody within the national borders, but the Census is only every ten years. Also, the Census is probably having a hard time keeping up with dynamic changes.

Second general data collection problem -- identifying causes of death

Causes of death are a tricky thing always. In the USA there is a continuing trend toward underfunding, understaffing, undertraining and substandard work by county coroner offices. It's a national problem that has been noted by various professional organizations. It's one of the anecdotal reasons that can be stated as evidence that the USA is already a Third World country.

This is another topic, probably not suitable for an econometrics site like EP. More for a demographics site. Anyway --

What comes to mind is declining averages for wages, disposable income and so forth -- averages presumably reflecting an underlying reality that we call 'standard of living'. Of course, median figures or quartiles would probably be more descriptive than averages as indicators of a Third World condition. The problem with the 'standard of living' indicator is that it's been falling for a long time now. Where do we draw the line? Are we looking for a singularity in the curve of the second derivative, or what?

Probably a very good source of data is what has been pointed out by Robert Oak, namely, food stamp participation. The problem is that food stamp participation rates vary with official poverty level income and wealth cutoffs used in determining whether applicants are qualified or not. And that may vary from state to state!

Four indictors of 'Third Worldliness'

So there we are. Four indexes of Third Worldliness for the USA --

Decline in standard of living

Food stamp participation rate or other 'soup line' reports

Endemic unemployment

Body count (mortality statistics)

So far we are only at 3 out of 4. Probably a Great Depression, yes. But 'Third World'? Not yet anyway.

'Third World' would be a constant-zero standard of living.

'Third World' would be famine, at least in some regions and in some years.

'Third World' would be civil wars among sub-populations over jobs.

'Third World' would be a very different mortality picture, including deaths from starvation (that are definitely not suicide)

Why mortality data may be best indicator

The thing about mortality numbers is that they are pretty much definite beyond dispute, although causes of death are nowhere near as objective or reliable as may be thought. There are, in the USA, death certificates issued for almost all deaths. And there are official annual estimates of the total population, based on the most recent census.

Based on mortality reports, it doesn't seem reasonable, so far anyway, to think of the USA as having declined to 'Third World' status. This appears to be the case, even considering differences according to U. S. Census categories for 'race', including the trans-racial 'Hispanic' super-category that was first introduced in Census 2000.

Yes, there are significant, even substantial, differences between different 'racial' groups and for 'Hispanic' versus other categories ... but not enough to identify any USA sub-population as 'Third World', at least not yet.

There are rumors of a sub-population subsisting below the radar along the border with Mexico. That's actually been a real situation for a long time. But it's hard to count that sub-population and difficult to say whether it constitutes a 'Third World' sub-population within the USA, or not. Since this is a long-term trend, it's difficult to decide where to draw the line. Moreover, in the case of this particular long-term trend, it's difficult to collect the data through which a line could be drawn!

Even if had better numbers, as accurate as those in the EU, we wouldn't automatically have an indicator of Third Worldliness. As the EU clearly demonstrates, economic refugees fleeing the Third World do not Third World nations make -- unless, perhaps, there would someday be a case of a non-Third World country that abandoned its border control or was at the point of disintegration anyway. (The EU is a different case -- transnational integration, not national disintegration, at least not so far.)
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These 2011 reports are subject to adjustment since the stats are still based on estimates from Census 2000. So these demographics are, just like econometrics, subject to revision.
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[Links tested and functioning, 1 September 2011.]

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The country as a whole hasn't gone from First World to Third World status, for the reasons you point out.

But it's been true for years that we fail dismally on numerous measures when compared to our First World peers.

Isn't the key question whether what we're doing today is going to enable our descendants live a First World life -- or not? On that score I think it's clear we are continuing to make disasterous decisions.

In Mexico the elite lives a mostly First World existence. That's another thing to look at -- the difference between the lives lead by elites, average and poor people.

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Everything about 'First World' and so forth is complicated by globalization. The champions beyond any competition as to low death rates are Saudi Arabia and the Gulf States. These really should be considered as a new kind of 'First World'. But these are all averages, and probably the averages do not include guest workers in those countries.

Estimated average crude death rate for the entire world is 8.6 per thousand. Death rate for the entire European Union is 9.6! Death rate for USA is 8.38.

But I still think that if we see more people dying in a country like the USA -- a year-to-year increase -- that would be a signal of Third World-ization. I think that because I read stories of a public square in Calcutta where thousands are constantly gathered to die and where the government provides a service to pick up and dispose of corpses on a daily basis. That's the place that received much attention from St. Teresa of Calcutta (Mother Teresa, beatified by popular acclaim). So I think that whatever 'Third World' means, it includes people dying in our midst in a way that they do not in the USA, at least not yet in large numbers. To some extent, this may be due to high incarceration and high overall institutionalization rates. However, I read news stories and hear anecdotal evidence that corpses are routinely picked up in cities in USA everyday -- people who died and froze overnight at a bus stop, for example. It's a matter of degree.

Some may say that I am equating over-population to 'Third World', and that may be, although it is, then, a matter of the definition of 'over-population' as much as it is the definition of 'Third World'! The Netherlands is more densely populated than either India or Haiti. Singapore is about as densely packed as any country in the world (behind only the gaming states of Macau and Monaco), yet Singapore has none of the characteristics we expect in a Third World country, unless autocratic government is one of those.

For our purposes, median and quartile figures are much better than averages. However, the most available and supported statistic for mortality comparisons across countries is life expectancy, which is a complicated calculation based on population data including migration, incidence of various diseases and trends in life expectancy for various diseases -- not a true statistic but a projection, a weighted average kind of thing. For my purposes, I would prefer the raw median age at death statistic. The idea, however, is that in USA median age at death is the same as life expectancy. So what we get is live expectancy numbers.

Duffy notes that median age at death (USA) in 1970 was 70 although life expectancy at birth was 71. However, in 2000, both were 78 (now creeping up on 79). That convergence of the raw median death statistic and the life expectancy projection, I suspect, is intentional as CDC life expectancy formulas are developmental.

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"That's another thing to look at -- the difference between the lives lead by elites, average and poor people." -- Jersey

Yes, that's the problem alright, not only with mortality stats. There are numbers by 'racial' categories plus the super-category of 'Hispanic', but I haven't found a good source for mortality according to income levels or poverty levels or homelessness.

Maybe somebody can help me in that regard.

Maybe I could figure something out be going down to the county-level reports and correlating income levels with counties, but that would be a whole lot of work (unpaid) and time (limited).

For sure, if I could get into stats of life insurance companies, and their underwriting standards, I would find interesting correlations between credit ratings and mortality rates used in calculating premiums and profits. But, even then, there would be questions of hidden and unidentified dependent factors. So there'd have to be a lot of data and then factor analysis.

I think shortcomings in data collection come down to bias -- the bias of media, bureaucracy and even of academia that SuperAmerica is basically perfect, the system is so good, that any mishaps must be considered to be the moral fault of those who 'can't cut it'. Therefore, rather than attempt to carefully count those who 'don't count', SuperAmerica attempts to solve 'the problem' by continuing to import foreign workers and outsource work -- which data, however, are also not collected and published with care.

Maybe I am too cynical, but I suspect that there is a small industry today, centered in Washington, D.C., to prevent data collection as well as to obfuscate data collection processes that are available to the public and are fairly transparent.

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I'll try to take apart a copula with the probability distribution functions and show how the inputs are required to be 1:1. That's the deal with the "gamma" filter and you have to replace those Copula symbols for the actual complete function and it's assumptions to see the problem. It's very complex so here is the Wired explanation in English. If you have advanced probability theory and statistics you'll get this, else, I'd click the above link read that plus the Wired for now. I think Wired did a great job to explain this without requiring everyone to get a PhD in probability and statistics (and still be lost).

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The text in this article or section may be incoherent or very hard to understand, and should be reworded if the intended meaning can be determined. The talk page may have details. (August 2011)

The 'talk page' takes you to where the author of the article has posted that a rewrite is in the works. 'WikiProject Statistics' and 'WikiProject Mathematics' are both involved.

But now, about the "1:1 inputs" ... what do you (RO) mean by that? The ui represent upper bounds for the Ui functions of the Xi, which are components of a pre-transform vector where all Xi are less than or equal to the same upper bound, x (nothing goes to infinity, everything bounded?). So what are the inputs? I am thinking inputs are the upper bounds.

I have googled on "1:1 input" and find only one link, to MIT concerning construction engineering (google-cached homework by Yeunwoo Cho, August 11, 2011) --

www-math.mit.edu/cse/codes/trusscode.m

Cho isn't actually using "1:1" -- really it turns out that every instance of "1:1" is in "-1:1". Cho writes in, I'm not sure exactly which programming language but something like C, pretty standard thing with some i's and some j's and a couple of k's here and there. Like sometimes there's "j=1:N" but sometimes that will be "-1:1" so you get the picture -- start at -1, then probably 0 and then stop at +1.

But I still don't know what "1:1 inputs" are.

What's most interesting ... or troubling ... is the assumption (in many places and maybe fundamental) of continuity. That's what we have discussed before here at EP, although not with the sophistication of the Wiki article. What happens when a discontinuity is imposed on a market, for example, a circuit breaker? Maybe it doesn't matter because there's always some market open somewhere. But still, the inputs are presumably based on actual market data from moment to moment, maybe even records of actual trades ... and there goes your assumption of continuity in the range of your function, out the window! You would just have to build a whole lot more theory and write (or otherwise generate) many, many more lines of Fortran or whatever. And any 'proof' you thought you could rely on .... what happened to that? What would Gauss say?

It's only the conceptual models that are continuous, wouldn't you think? That is, the underlying thing is discrete mathematics. That is, the empirical copulas. But then there follows immediately the "Monte Carlo integration" for the "quantity of interest" -- approximated through the Monte Carlo algorithm. Now we are going to infinity, of course.

So, okay. Then having given due credit on the pure math side to the one and only Carl Friedrich Gauss (to be expected in any branch of mathematics!) and also Archimedes (how did Archimedes get into this? because "it's all Greek to me"?) -- we get to "Applications," quote below --

Dependence modelling with copula functions is widely used in applications of financial risk assessment and actuarial analysis – for example in the pricing of collateralized debt obligations (CDOs). Some believe the methodology of applying the Gaussian copula to credit derivatives to be one of the reasons behind the global financial crisis of 2008–2009. Despite this perception, there are documented attempts of the financial industry, occurring before the crisis, to address the limitations of the Gaussian copula and of Copula functions more generally, specifically the lack of dependence dynamics and the poor representation of extreme events. ....

While the application of copulas in credit has gone through popularity as well as misfortune during the global financial crisis of 2008–2009, it is arguably an industry standard model for pricing CDOs. Less arguably, copulas have also been applied to other asset classes as a flexible tool in analyzing multi-asset derivative products. The first such application outside credit was to use a copula to construct an implied basket volatility surface, taking into account the volatility smile [see link at Wiki] of basket components. Copulas have since gained popularity in pricing and risk management of options on multi-assets in the presence of volatility smile/skew, in equity, foreign exchange and fixed income derivative business. ....

Recently, copula functions have been successfully applied to the database formulation for the reliability analysis of highway bridges, to the analysis of spike counts in neuroscience and to various multivariate simulation studies in civil, mechanical and offshore engineering. [citation needed]

There was once, and may still be, a mysterious building in Corvallis, Oregon, where there was very little observable activity of any kind (although building and surrounding grounds were scrupulously maintained) and which had just one label on it, "Applied Theory." People around OSU generally assumed the building to be some part of the secret government (so secret that I can neither confirm nor deny that it exists).

Revenge of the geeks?

The dilemma may be that the more you try to eliminate risk, the riskier it gets.

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A slow motion pervasive blackout has afflicted the East Coast from South Carolina to Maine. Millions are without power and the blackout statistics are not firm and not trustworthy. Typically, mainstream media lays this off on a storm. This is not so.

Private utilities have underinvested in Grid Infractructure according to IEEE's infrastructure report and other better analyzes. The second empirical confirmation of underinvestment is part of the utility industry's practice of dividend payout of almost all profits. This leaves America with a confused, aging grid vulnerable to storms. And the storms will only get much worse.

Upper management in private utilities practices a corrupt culture of cronyism with the utility regulators that makes even K-Street blush. Like all of corporate America, the focus is keeping the hog feeding trough of executive compensation full with the rate-payers money.

There is a danger of ever larger blackouts, major parts of the country without power for months, and repair crews unable to keep up. On the East Coast, folks will endure Irene induced blackouts for weeks. The economic effect touches lives, commerce, e-commerce and all aspects of life in these times.

It is almost too late for the more elegant solutions of centralized grid management. But BigTech is lauching incredible conspiracies to take over the Grid. Now, we are faced with survival situation.

Ordinary folks will have to find ways to generate their own power, as a matter of economics and survival. At this time, you can buy wholesale natural gas at half price and electicity the same and generate your own power.

But not all will be able to afford these solutions, never mind understand the technology and the economics of power distribution. Therein is the danger to the economic fabric of society, if you will, the social contract as it has come to be. Government is giving us no leadership or vision to look ahead, plan or at least survive. The worst in government, do not even believe in any kind of emergency aid.

A bit of science, if that is allowed in this country still. More than twice the molecular volume of fossil fuel combustion takes the form of water. CO2 is only half of water volume. That fantastic torrent of water is finding its way into every kind of extreme weather.
We need to fear and plan for the worst.

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I always tell my anarchist friends that where there's a power grid, there's a government. The only question is whether that government is publicly owned and managed, privately owned and publicly regulated .... or ..... (Some of them have moved off-grid!)

As I recall, going back about 150 years, Fisk and Gould managed high profits (mostly going into their own pockets) for the NYC RR by having crews turn track around rather than replacing it. That would work for a while, because the track was originally T-shaped, and one whole half of the top of the T had not been used. Simple matter of business sense.

But then, as need arose to replace track again, Fisk and Gould management ordered the track turned again .... and again .... and again. Eventually there were frequent accidents. Eventually British share holders staged a revolt, seeking to displace Fisk and Gould, but the rascals avoided the seemingly inevitable by stealing the printing press used to print stock certificates, moving it in the dead of night across the river to New Jersey, there printing up enough shares to control the election of a 'new' board of directors at the next general meeting!

Some anarchists suggest solutions for this kind of misbehavior, not pretty.

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What the US public fails to understand is that the bankers WANT us unemployed. And they WANT the US wrecked and they WANT the Chinese to be our overlords. Why? Because Americans are too productive and create TAX SURPLUSES like we did in the late 90s, which allow Americans to pay CASH for cars and houses. Paying CASH means NO NEED for bankers' loans!

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